A Dow Jones Newswire story attributes today's selloff in Open Text shares to a report from the Center for Financial Research & Analysis. The Center doesn't comment on its reports, but they give this summary from analyst Brandon Osten of Sprott Securities:
"...the report deals with Open Text's earnings and its accounting in connection with the acquisition of Information Dimensions last summer. He said the report doesn't question Open Text's revenue recognition, which he said is positive."
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Below is taken from the Fiscal 1998 Open Text Annual Report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- ACQUISITIONS
Information Dimensions
. On June 3, 1998 the Company acquired certain of the assets and liabilities of Information Dimensions for approximately $8.1 million which consists of cash paid on closing of $7.6 million and an accrual of $500,000 for contingent consideration that the Company expects it will be obligated to pay to the vendor one year from the closing date based on the delivery of a special purpose balance sheet of the assets and liabilities assigned as at May 31, 1998. In addition, the Company accrued acquisition costs of $8.2 million. The operations of Information Dimensions have been included in the financial statements from the purchase date.
. A key element of the acquisition is the Company's perception of the value of Information Dimensions document management technology. Although Information Dimensions is a leading document management technology, it is the Company's belief that substantial development will be required to complete the software technology to meet the Company's strategic goals.
. The Company allocated the total purchase price and restructuring costs to the assets acquired as follows:
(in thousands)
Tangible net liabilities $ (2,876)
Current software products 2,250
Software technology under development 8,726
Acquisition related expenses 8,150
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$ 16,250
. The software technology valuation was accomplished through the application of an income approach. Projected debt-free income, revenue net of provision for operating expenses and income taxes were discounted to a present value. Software technology was divided into two categories:
~ current software products
~ software technology under development
. Current software products include products currently in the marketplace as of the acquisition date. The fair market value of the purchased current software products was determined to be $2.25 million. This amount was recorded as an asset and is being amortized on a straight-line basis over two years. Software technology under development included the value of products still in the development stage and not considered to have reached technological feasibility stage.
. As a result of the valuation, the fair market value of the development costs was determined to be $16.9 million. In accordance with applicable accounting rules, this amount was expensed upon acquisition.
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The CFRA is run by an associate professor of accounting at American University named Dr. Howard M. Schilit. Apparently he's putting this in his category "Shenanigan No. 7":
schilit.com
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